Comparing Car Costs: Buy New, Buy Used or Lease?

Car Buying Learning Center

How does the cost of leasing compare to buying the same new car in terms of out-of-pocket costs? Or, if you decide to buy a used car, how much more will that save you? And finally, what do those costs look like in the long run?

These are important questions for consumers who want to limit their automotive expenses over the years. It's hard to give one definitive answer that covers all people and all situations. But here we will divide this issue into two parts:

1. An analysis of the cold, hard costs of three different ways to buy a car: leasing, buying new and buying used.

One Car, Three Financing Methods
In this analysis we look at an average car ownership period, which Polk estimates now is almost six years. As an example, we chose the 2015 Honda Accord EX sedan, which has a True Market Value (TMV®) price of $24,985. That's the average price paid for the car in the area around Edmunds' Santa Monica headquarters.

Here's how we structured the different deals:

Leasing: As of this writing, this Honda Accord EX has a lease special listed on our incentives and rebates page. The lease runs for three years, requires no drive-off fees and carries a $339 monthly payment (California tax is included in this figure but not registration fees).

Buying New: To buy this Accord, worth $24,983, we chose a five-year loan with a 20 percent down payment of $4,997. At the currently available 2.99 percent interest rate, the monthly payment is $396.

Buying Used: As a three-year-old car, the 2010 Accord EX has a used TMV dealer retail price of $17,108. We chose a four-year loan with 10 percent down ($1,710) and financed the purchase at 3.5 percent for four years. (Interest rates on used-car loans are slightly higher than new-car loan rates.) The monthly payment is $372.

Keep in mind that with our six-year ownership scenario, we would need two lease cycles of three years each. For the new car, it would be one five-year loan, plus one additional year of ownership with no car payments at all. For the used car, it is a four-year loan and two years without car payments.

After six years, here are the total out-of-pocket costs of each approach (including tax for California):

Leasing

Buying New

Buying Used

Total out-of-pocket costs

$24,161

$28,757

$19,566

In terms of out-of-pocket expenses, leasing appears to cost $4,372 less than buying a new car. Buying a used car is $4,818 cheaper than leasing, and a whopping $9,190 cheaper than buying a new car.

Here is something to remember about the apparent lower cost of leasing versus buying new: At the end of two leasing cycles, the person who leased doesn't own the car. He or she has to start a new lease-or-buy cycle. Meanwhile, the person who bought a new car would own a vehicle that now is worth about $11,000, according to the depreciation listed in Edmunds' True Cost to Own (TCO®) calculator. The person who bought the used car now owns a nine-year-old car worth about $5,000.

When we factor equity into the equation, the cost picture changes:

Leasing

Buying New

Buying Used

Final costs

$24,385

$17,756

$14,566

In this basic comparison, it appears the person who leased the two Accords paid $6,628 more to drive these cars for six years than did the new-car buyer. Buying a used Accord saved the person $9,817 as compared to leasing during this six-year cycle. Furthermore, if both the new-car buyer and the used-car buyer want to keep driving their Accords, they can do so without having a monthly car payment.

Related Expenses
We should point out that the person who leased has escaped the repair and maintenance costs that car owners typically encounter with aging cars. Meanwhile, the car buyer has to pay for routine maintenance, which is usually just oil changes and tire rotation, as well as paying at least for new tires and brakes, which would cost about $1,000. (Some new cars come with free maintenance programs, but Honda does not offer that perk.) The used-car buyer will have to pay for these items and probably some additional repairs, too.

However, the higher cost of insurance for a leased car erases some of the maintenance and repair savings. Insurance for a leased car, such as the Accord EX, would be at least $150 extra each year, adding up to $900 for a six-year cycle.

In short, the person who leases saves money on extra maintenance costs, but pays almost as much as those costs in extra insurance premiums. It's close to being a wash.

Leasing's Other Advantages
While it is true that the people who lease have no car at the end of the lease, they do have the opportunity to purchase the car at a preset price. The finance company sets the purchase price for the leased car at the beginning of the lease, which offers car leasers several advantages.

First of all, leasing protects the consumer from excessive depreciation. If the market value of the car drops due to unforeseen circumstances, such as rising gas prices, this drop in value doesn't hit the consumer. Conversely, if the lease car holds its value especially well, the consumer can buy the car at a bargain price, and either keep or resell it. In some cases, consumers can leverage equity that they've built up in a leased car.

One other big advantage to leasing is that it offers an attractive tax deduction for someone using the car for business. An accountant is the best resource for more information on this subject.

The Appeal of Ownership
It's hard to put a price tag on the value of ownership. The person who buys a car owns it and can experience the pride that goes with it. Beyond just the abstract enjoyment of possessing a nice car, ownership does offer several other advantages.

You can modify the car exactly as you want without fears that you will break the terms of your lease. Excess wear and tear is not a concern for the car buyer. Also, owning the car gives you more flexibility to sell the car when you want, not when the lease is up.

Finally, there are some other important elements to consider as you decide. These are harder to monetize:

Leasing provides the enjoyment and prestige of driving a newer car more often.

Leasing puts you in a new car that has the latest safety, technology and comfort features.

Leasing in three-year cycles means you are always under the manufacturer's bumper-to-bumper warranty.

Owning a car allows unlimited driving with no mileage penalty. Leasing limits a person to only 10,000-12,000 miles per year. After that, each mile typically costs 15 cents.

While there are many factors to consider when making the lease-or-buy decision, the best place to start is with the numbers. Do your own calculations, factor in the intangibles and the best decision will emerge.

Comments

Time value of money is also not clearly taken into consideration. If you lease, you are saving on monthly payments out to at least 3 years. Those savings can be either invested or spent otherwise immediately, where as with buying you may save over the "long run", but money later is worth less than money now...

@rbdeli61
The math says you forgot to mention that you likely paid (or managed to negotiate down) about a $3000 Cap Cost Reduction in your "due at signing" payment. That's what the mat says about your supplied numbers.

A large part of this argument depends on how long you plan to keep your car. I know most of this is based on averages, but if your going try and keep your car for as long as possible then buying new may end up being cheaper than buying used. In theory if you buy a 3 year old used car then it will last 3 years less than a new car. I think the value of those 3 years extra you get from buying new makes the new car the best option if like me you plan to drive the car for as long as possible. I personally try to get 10 years out of mine.

In your buying an old car vs. leasing a new car analysis, you left out the positive effect of buying a new car model with improved gas mileage vs. the poorer gas mileage of an older car. That could be a game changer. This is the only point that I see may help some people have better overall view of their purchase vs. lease situations.

My wife and I leased a new 2013 Acura ILX for $350/mo. for 39 months. The lease would have been $306 per month if we didn't take insurance on the tires and wheels (damaged wheel is $1000 to replace). We put $1500 down. At $350/mo. for 39 months, the total would be $13,650 + $1500 =$15,150. At $306/mo., it would be $11,934 + $1500 or $13,434. Buyout option at the end of the lease would be $13,200 (which you could take a loan on and pay off).

I have been insuring vehicles for individuals and families for the past 12 years. I have yet to see, in RI anyways, someone's premium be higher for a leased vehicle vs an owned vehicle. Most carriers do not even ask the question.
Once the owned vehicle loan has been paid off, the consumer has the option to remove expensive physical damage coverage from their vehicle that is required by finance companies. This reduced coverage would only apply in this example for the years after the loan has been paid off. The annual amount would vary greatly depending on the vehicle, driver characteristics, and driving history. $150 per year seems on the low end for comprehensive and collision coverage in RI.
I would be interested to know which companies (and in which states) people are charged a higher premium for leasing a vehicle compared to buying it.
**Not that it changes anything, but I just realized this article is two years old**

I recently updated this article with new information and figures. In this example, the TMV (True Market Value) price of the car that was leased was $27,000, not $20,000 as stated in this comment. In this example, there was also $0 on drive off fees which makes the monthly payment higher. The monthly payment was $344 which was offered as a typical example of a typical lease payment. This was done for purposes of comparison to shed some light on the three different scenarios not to try to say that buying is better than leasing.
Furthermore, in this article, I offered other non-financial reasons to consider leasing over buying or buying a used car.
I wrote this article to reveal costs, not to state my opinion. I hope you will read it that way and learn from the information.
Philip Reed, Senior Consumer Advice Editor, Edmunds.com

We bought a used Honda Accord 1998 in 2008, cost us about $7,500. Now, the dealer valued it at about $2,000. So the cost of ownership for 5 years is about $5,500. Given that it will continue to depreciate, then the 6 years cost of ownership is about $6,000. So, where does my story fit into the scenario above?
For a 6-year cycle, we could save almost $10,000. That's an extra money the wife can spend on other stuffs.

I am in a quandary between buying new, buying old or leasing. The biggest advantage of leasing is getting a high end car (I like to drive) for a lot less money per month. For example: 2014 Cadillac ATS at around $375/month 36 months. The buy out is steep at $25k but what a great car! or I can get a used BMW 328ix for $25k with $10k down for around $200 per month. Buying new isn't an option at around $45-48K for me. It seems obvious that the used BMW is the way to go, but repair costs on these fine cars is huge. Whereas the Cadillac is maintenance free for 36months. After 3 years the BMW is getting pretty old while the Cadillac is still fresh, but do I buy it? that's $25 for a 3 year old car so I am back to where I was with the BMW. I think I am starting to answer my own question (this website is good!!). To perpetually lease the latest car is very attractive to me because of my pleasure factor but in the end there is no equity to show. Just a lot of pleasure. I have lost pretty big on new cars due to depreciation so I won't consider them again.

I see a couple of issues with this writer's analysis of leasing vs buying. Most importantly the money you don't spend on a car has to go somewhere else. If it goes to entertainment, then the net result does not change. But the way I have always calculated my own financial options for leasing or buying is that I have a total budget to be invested, and if I am buying a car then I am investing in a depreciating asset. But if I am leasing a car, then the money I do not spend, monthly, on the lease goes into my 401k, tax free, and is invested in an appreciating asset (and matched by my employer).
This makes a huge difference and at the end of the period of a loan vs lease, the money not invested in the car but invested in the SandP 500 has appreciated dramatically, off-setting the entire cost of leasing a car (using historical rates of return, not selecting for best or worst or most recent periods).
This is a key flaw with every lease vs buy analysis I see online. In the real world of family budgets, the money you don't spend on a monthly payment goes somewhere. If it goes to dining out and bars, etc, then there is no net gain and the purchase is better than the lease. But if the savings go to another investment, which to me is the only sensible way to account for the differences, then leasing is far less expensive.
I drive an Outback. Current lease rate is 269 before taxes. They are offering an interest free loan to purchase. At 3 years that's 720 per month. At the end of the 3 year period Kelly blue book says the car is worth roughly 19,000. The difference between the 720 purchase payment and 269 lease payment is 451. I put the 451 in my 401k and it's actually 563 before taxes, let it grow at 5-7% per year. At the end of 3 years I'm net ahead.
Of course I have to emphasize this only works if you view the 720 payment as money available for investment, and this only works if the difference between the lease and purchase goes directly to your retirement account.
What do you think?

Hi,
I am trying to get a new car. I am in love with the new chevrolet Impala. it cost more than i have. I am whiling to either lease it or buy it but i do not have any idea on what would be the best choice.
it cost, according to www.chevrolet.com, $32,885 and I only have 16.000
I need help please!

Convenience factors are not really taken into consideration. A used car may be slightly cheaper than a new car over time, but the extra time and inconvenience that used vehicles may require for unexpected repairs, maintenance, and loss of transportation availability can be a great loss. For less than a couple grand more over time, a person can buy a brand-new car which doesn't have an unknown history and is less likely to need repairs as soon. Well worth it.
Leasing only makes sense if you are someone who likes to get a new car every so often. Clearly, leasing is more expensive over time, but to some people who have more disposable income, leasing is worth the extra long-term cost.

After buying for a while, I've found that looking for barely used cars (3 yrs old and under 20k miles) gives you the best deals generally speaking. Was able to pick up a 2006 M45 with 9k miles in 2009 for $10k under the list price of other M45's at the time and a used 2013 Golf R with 10k miles $5k under the price other dealers offered for used cars in the same category, not to mention most were 2012's. I still get to use the manufacturers warranty and with the money saved, I was able to get extended warranties on the cars. Once you fall outside of that 3 year mark, you're generally going to find lower prices but the warranty is either close to expiring or already has and costs for repairs can be high. This applies more to cars with gizmos than older cars but it can still add up. I believe my cousin was quoted $600 to replace the clock in a 2003 Corolla since the entire unit is shared with the radio.

Some cars 'lease well' and others do not. Remember, you are only paying for the depreciation over the lease period so if you choose a car that depreciates very rapidly then that will be reflected in your payments. I actually made money on a Nissan Frontier because the lease-end buyout cost was about $2,500.00 less than what Carmax would pay me for it. I financed it through the leasing bank, then the day the new title arrived I took it to Carmax and sold it to them. Worked beautifully! I now lease BMW's as they also lease well. BMW will also sweeten the deal and offer to end your lease early if you lease through them again. I know at some point I need to get off the leasing merry-go-round, but for now I enjoy driving a new car every few years without the worry of negative equity.

The actual true cost of used versus new is not as significant as it appears. Say a person buys a new vehicle with an MSRP of $20,000. A smart buyer should be able to buy that vehicle for at least 10 percent off MSRP. In this case, $18,000. With a five year loan, the buyer has paid the $18,000 plus interest, which is quite minor with today's low interest rates. However, after five years the vehicle still has value. Say $8,000. That means the buyer is out $10,000.
Now say the buyer buys this same vehicle used, perhaps at $8,000. In five years, the buyer has paid $8000 plus interest. Interest on a used vehicle is usually higher than on a new vehicle. After, five years the vehicle is worth say $1,000 wholesale. That means the buyer is out $7,000. Of course, with a used car the buyer pays far more in maintenance and repairs. It is not unreasonable to assume those costs could be $2,000 more than the new car buyer would pay. The used car buyer has paid a total of $9,000.
Finally, the new car buyer after five years has a vehicle that should last far longer the the used vehicle will last. Therefore, the used car buyer will now be required to purchase a replacement vehicle while the new car buyer still has time with the current vehicle.
There is no set rule as to whether new or used is most appropriate in all cases. Each buyer has unique goals and abilities. However, in the long run, the actual cost of new versus used is not always significant. All cars cost money to operate.

"More than one out of every four new vehicles were rented, rather than bought, by American consumers — and the percentage choosing a lease has risen sharply over just the last two years. It is now roughly 27 percent, up from 22 percent in 2012, according to Edmunds.
“The consumer mind-set has shifted in many ways; it’s been driven by this narrow focus on monthly payments, regardless of total cost,” said Jessica Caldwell, senior analyst at Edmunds. “That’s a perfect environment for leases, where auto dealers already try to keep customers’ attention on the monthly payment.”
The lease has offered a solution for many shoppers: a chance to drive home in a vehicle that has the latest technology, while still keeping that monthly payment within reach. And, the thinking goes, in three years, when it is time to return the car, the technology will have advanced so much that it will be time to upgrade. Owners can dump their suddenly obsolete infotainment system for the new version."
Auto Leasing Gains Popularity Among American Consumers (NY Times)

† Edmunds.com received the highest numerical score in the proprietary J.D. Power 2014 Third-Party Automotive Website Evaluation Study℠. Results based on responses from 3,381 responses, measuring 14 companies and measures third-party automotive website usefulness among new and used vehicle shoppers. Proprietary study results are based on experiences and perceptions of owners surveyed from January 2014. Your experiences may vary. Visit jdpower.com.